Asia L/S Equity PM/Macro/Thematic Idea Generation

Rikki Malik

Cross Asset Strategy

<ul>
<li>A monthly review of how the markets and our themes are currently performing</li>
<li>Analysing what went wrong and what went right in stocks and sectors</li>
<li>Highlighting positions added or removed from the thematic investment portfolio</li>
</ul>


A monthly review of how the markets and our themes are currently performing
Analysing what went wrong and what went right in stocks and sectors
Highlighting positions added or removed from the thematic investment portfolio


Executive Director, Metrical Inc

Aki Matsumoto

Executive Director

Independent Leading Corporate Governance Research

Metrical Inc

METRICAL INC. is an independent leading Corporate Governance research firm in Japan where Corporate Governance is increasingly recognized as an important element on corporate management in these days. Thus, CG research and solutions would become an essential component of global capital markets and play important to contribute to transparency of the markets and maximize shareholders’ value in Japan. 

METRICAL INC. provides Corporate Governance research and analysis including rating services, and  also offers investment research and IR services with solutions and customized profound research on CG and IR issues.

<ul>
<li>Companies with larger market capitalizations tend to have higher profitability and valuations, and those companies have higher foreign ownership.</li>
<li>Given that board practices improved and that valuations, highly correlated with foreign ownership, are higher for companies with larger market capitalizations, this can be due to engagement of overseas investors.</li>
<li>If this hypothesis is correct, the gap between the top and bottom market capitalization companies will widen further as it takes a certain time for engagement to pay off.</li>
</ul>


Companies with larger market capitalizations tend to have higher profitability and valuations, and those companies have higher foreign ownership.
Given that board practices improved and that valuations, highly correlated with foreign ownership, are higher for companies with larger market capitalizations, this can be due to engagement of overseas investors.
If this hypothesis is correct, the gap between the top and bottom market capitalization companies will widen further as it takes a certain time for engagement to pay off.


Engagement Keeps Widening the Profitability Gap Between the Top and Bottom Companies in Market Cap

Technical Analyst, Vermilion Research

Joe Jasper

Technical Analyst

Technical and Quantitative Research

Vermilion Research

Vermilion’s objective is to deliver timely, actionable, and unique technical research to professional investors through the application of our various technical indicators.

Our research strategists seek to highlight securities which we believe are at major inflection points, based on our various technical and quantitative indicators, and offer asymmetric risk/return profiles. Our unique research methodology, centered on relative strength, enables our strategists to deliver superior investment recommendations.

Our process begins by organizing the universe of actively traded stocks into discrete sectors, then into industry groups. We then apply our technical and quantitative tools to identify developing price trends. Once attractive trends are identified within a selected sector or group, we screen for individual stocks which we believe offer the best risk/reward profile. We provide a historical perspective that often reveals, through our long-term charts, how price patterns often repeat themselves over time.

Technical Analysis

<ul>
<li>Global MSCI indexes (MSCI ACWI, ACWI ex-US, EAFE, and EM) are pulling back following recent breakouts to multi-year highs. Europe, Japan also pulling back to uptrend supports.</li>
<li>Short-Term supports to watch-discussed in our May 23, 2024 Int'l Compass-include $110.50 on ACWI-US, $53.50 on ACWX-US, $80 on EFA-US, and $41-42 on EEM-US; buy this pullback. </li>
<li>As long as these supports hold, we anticipate significantly higher prices ahead. Combination of supports holding and healthy market dynamics continues to validate our bullish outlook on global equities.</li>
</ul>


Global MSCI indexes (MSCI ACWI, ACWI ex-US, EAFE, and EM) are pulling back following recent breakouts to multi-year highs. Europe, Japan also pulling back to uptrend supports.
Short-Term supports to watch-discussed in our May 23, 2024 Int'l Compass-include $110.50 on ACWI-US, $53.50 on ACWX-US, $80 on EFA-US, and $41-42 on EEM-US; buy this pullback. 
As long as these supports hold, we anticipate significantly higher prices ahead. Combination of supports holding and healthy market dynamics continues to validate our bullish outlook on global equities.


Buy the Pullback; Market Dynamics Remain Healthy; Buys in Tech, Discretionary, Healthcare, Utilities

<ul>
<li>Companies with higher ratings for Corporate Governance Practices (Board Practices and Key Actions) tend to have significantly higher profitability, market capitalization and valuations.</li>
<li>Foreign ownership has the highest correlation with the Metrical CG score, suggesting that years of overseas investor engagement have improved the companies' corporate governance practices and profitability.</li>
<li>The pace of efforts varies with criteria of Corporate Governance Practices.  Companies with Metrical CG scores of over 70% are ahead in % independent directors and % female board members.</li>
</ul>


Companies with higher ratings for Corporate Governance Practices (Board Practices and Key Actions) tend to have significantly higher profitability, market capitalization and valuations.
Foreign ownership has the highest correlation with the Metrical CG score, suggesting that years of overseas investor engagement have improved the companies' corporate governance practices and profitability.
The pace of efforts varies with criteria of Corporate Governance Practices.  Companies with Metrical CG scores of over 70% are ahead in % independent directors and % female board members.


Why Are Companies with High Corporate Governance Practices Ratings More Profitable?

<ul>
<li>Even after the TSE's request for a P/B increase, it is not possible to raise valuations simply on the expectation of a P/B increase without improving profitability.</li>
<li>Most companies have cash allocation challenges. Companies with higher profitability will accumulate even more cash on hand, so higher level of shareholder return will further positively impact ROE and ROA.</li>
<li>Some of the companies that have reduced valuations include those with relatively high ROE and ROA, so there are small-cap stocks with reduced valuations and increased investment opportunities.</li>
</ul>


Even after the TSE's request for a P/B increase, it is not possible to raise valuations simply on the expectation of a P/B increase without improving profitability.
Most companies have cash allocation challenges. Companies with higher profitability will accumulate even more cash on hand, so higher level of shareholder return will further positively impact ROE and ROA.
Some of the companies that have reduced valuations include those with relatively high ROE and ROA, so there are small-cap stocks with reduced valuations and increased investment opportunities.


Increasing Profitability to Gain Support from Overseas Investors Is a Condition for Higher Valuation

Japan

The TOPIX, also known as the Tokyo Stock Price Index, is a capitalization-weighted index of all companies listed on the First Section of the Tokyo Stock Exchange. The index is supplemented by the subindices of the 33 industry sectors. The index calculation excludes temporary issues and preferred stocks, and has a base value of 100 as of January 4, 1968.

TSE Tokyo Price Index TOPIX (TPX INDEX)

May Themes and Thematic Portfolio Review

We review overall market performance, our investment themes, highlighting additions and substractions in the thematic portfolio.

Rikki Malik

Engagement Keeps Widening the Profitability Gap Between the Top and Bottom Companies in Market Cap

I would like to discuss what characteristics and trends are most likely to be observed by dividing the companies into six groups by market...

Metrical Inc

Buy the Pullback; Market Dynamics Remain Healthy; Buys in Tech, Discretionary, Healthcare, Utilities

Buy the Pullbacks in $EFA $ACWX as they hold above $80 and $53.50 supports; Europe and Japan also buyable pullbacks to uptrend supports; Market...

Vermilion Research

Why Are Companies with High Corporate Governance Practices Ratings More Profitable?

I would like to discuss what relationship there is between corporate governance practices, company profitability, and valuations.

Metrical Inc

Increasing Profitability to Gain Support from Overseas Investors Is a Condition for Higher Valuation

In this article, I would like to try to summarize the recent analysis of "Percentage of Foreign Share Ownership" and "Valuation trends over the...

Metrical Inc